GDP or Gross Domestic Product is a numerical indicator of the current economic condition of a country in terms of the final value of goods and services produced within a specific geographic region over a definite time period. Normally, GDP is calculated for a country or the states within the political territory of the country for a whole financial year. Therefore GDP calculation is also carried out to compare the economic growth of different countries. GDP is normally expressed in terms of the currency of the country. However for comparing the GDP of different countries it can also be expressed in other currencies too, especially in the US dollar.
Different approaches to GDP calculation
There are three principal approaches to GDP calculation have their respective processes. Here we will see how to calculate GDP in these different methods:
Output Method
This is also called production approach of GDP calculation. This is the measure of the market value of all goods and services produced in a country in one financial year. Here, the market value means the ultimate price of a product or services that the end customers pay for that particular product and service.
Here, the total GDP is calculated by at first summing up the gross value added by institutional units that are produced within the economy and the taxes on products and import like VAT, excise tax, and customs duties and then deducting the subsidies on products and services.
The GDP calculation goes as follows:
Total output in terms of both goods and services (market values) – Intermediate consumption for producing goods and services =
GDP at market prices + Taxes on products and import x Subsidies on products
= GDP at market prices
Income Method
In this process, the total income earned by the factors of production or the factors related to the services available in a country are calculated for finding the GDP of countries.
Calculation of GDP in income method is based on the gross income of those organizations or legal entities who are directly involved in the production of goods and services in a financial year.
The GDP calculation in this approach goes as follows:
Income of the employees in different form like office executives, skilled and unskilled workers, etc.
+ Income of the self-employed people
+Profit earned by the business entities
+Taxes paid at different phases of production
+ taxes paid on import of all goods and services
x Subsidies on production of goods, services, and import
= GDP at market prices
Expenditure Method
This is the most common method of calculating GDP. Simply, it is the total expenses made by all, including the citizens and any other legal entities in procuring goods and services in a year.
Here, the GDP calculation is based on expenditures incurred in a financial year by all the legal entities within the concerned economy.
The GDP calculation goes as follows:
Consumption of the households
+ Total private expenditures of the households for procuring different services
+ Total government spending on public and private services
+ Capital expenditure incurred by the business entities
+ Expenditure on inventories (for adding values)
= Total expenditure
Now, the Total Expenditure + Total Export value at market prices – Total import value at market prices
= GDP at market prices
As all these data are not available from any single source and the agencies collecting these data take different procedures, the outcome of all these three approaches sometimes differ.
